ABSTRACT
This chapter discusses some of the inter-relationships in the orthodox approaches among inflation, expectations and unemployment. It explores two of the major alternative ways in which expectations have been modelled, namely adaptive and ‘rational’ expectations. The concept of ‘rational’ expectations can be illustrated within the context of a single market, which shows the rapid market-clearing properties of ‘rational’ expectations. There is a broader problem, which relates to the development of new models of the economy based on ‘rational’ expectations. It is assumed that economic agents within a model already know all about that model, and base their expectations of the future on knowledge of that model, and their other prior information. The ‘rational’ expectations and the ‘surprise’ supply function approaches have become influential variants of the general monetarist approach, under which markets are close to perfect competition and quickly move to equilibrium.
